September 2012 Q2

[AKS01]

Hi,
In part (ii)(c), I understand that if the realistic and prudent assumption changes by the same amount the release of reserve won’t really be affected, therefore it would lead to an unchanged PVFP. However, if the realistic basis assumption is amended to reflect the worsened mortality experience, won’t the projected claims value increase which would reduce the PVFP?

 

[Mark Willder]

Hi,
In part (ii)(c), I understand that if the realistic and prudent assumption changes by the same amount the release of reserve won’t really be affected, therefore it would lead to an unchanged PVFP. However, if the realistic basis assumption is amended to reflect the worsened mortality experience, won’t the projected claims value increase which would reduce the PVFP?

Hi

I'm afraid your explanation here isn't right. If we increase the reserving basis (prudent) assumption then we increase the reserve now, and so there will be more reserves to release in the future. So the release of reserves is affected, it goes up, and so increases PVFP.

But I do agree with you that the realistic basis assumption would reflect the worse mortality, so projecting more claims, which reduces the PVFP.

So we have the first paragraph pushing the PVFP up and the second paragraph pushing it down. These factors may largely cancel out if the two bases are increased by similar amounts.

Best wishes

Mark

 

[AKS01]

Thanks Mark, that makes a lot more sense.